FINANCIAL PLANNING FOR THE YOUNG INDIANS- “A NECESSITY”
Rapid growth can be seen across length and breadth of the country. You think of any sector, whether it is Infrastructure, Banking, Real Estate, Software, Hospitality or Tourism, we hear positive news, growth and bullish expectations. Be it institutional investors or mutual funds, they all seem to be bullish about the economy.
The story behind the story is that never in the history of the country, there have been so many young people contributing to the growth of the country. Now there are millions of young software technology professionals, MBA’s from top business schools in India and the entrepreneurs who are willing to go against the tide. Moreover, they have a significant amount of disposable income in hand and enormous amount of spending opportunities available. The question that arises here is: ARE THE YOUTH OF TODAY IN A POSITION TO MANAGE FINANCES EFFECTIVELY?
The things that are most talked about by the youth nowadays are mobiles, gadgets, credit cards, cars, parties etc. The list can actually go on & on & on… However, the idea here is not to put anybody at fault or tell the educated youth what to do & what not. The objective here is to create awareness to build a strong foundation & transform a GOOD LIFE to GREAT LIFE.
One should understand that it is never too early to start saving, investing and learning how to manage finances. There might be no financial pressures and decisions at this age but still we can incorporate good financial plan into our lives. Starting early sets the stage for longer-term financial fitness. One should follow the rule of “SAVE FIRST & SPEND LATER” and understand that EVERY RUPEE SAVED is equal to EVERY RUPEE EARNED. We need to distinguish between needs and wants. One way to avoid either spending only on needs or only on wants is to classify the expenditures as needs or wants. Then set aside enough of the earnings to buy our needs. Put as much aside as possible for savings. Leave a smaller amount for the wants. How much we set aside for savings will depend upon how eager we are to build wealth. The idea of setting aside an amount for the savings before we spend on our wants is called the “pay-yourself-first principle”.
Now after learning to walk, its time to run… So just what is Financial Planning? Financial planning is a step-by-step process that helps us identify and ultimately reach our financial goals. It clarifies where we are now, where we want to go and what we need to get there. The term Financial Planning is a wider term in itself covering every aspect of our life including Insurance Planning, Retirement Planning, Investment Planning, Tax Planning and Estate Planning. Now explaining briefly every aspect let’s start with:
INSURANCE PLANNING
Every good financial plan needs to start with a good foundation by protecting the risk. Here risk includes life insurance, health insurance and insurance of valuable assets, liabilities etc. The purpose of life insurance is to lessen the financial impact associated with death/ unexpected loss of assets / unexpected health challenges. Life insurance is to provide financial protection for the one’s dependant family. Without the continued benefit of the income, the dependant family might have to compromise on their ongoing expenses for housing, transportation, food, clothing and other necessities. Insurance can bring peace of mind, knowing that these risks are covered. Life Insurance should be selected to protect the life risk and not for the great returns it offers. We need to balance the cost and the investment component, hence it would be advisable to get a Term Insurance cover and invest in Postal Savings schemes, Mutual Funds, Direct Equity, Real Estate and the opinions are endless.
RETIREMENT PLANNING
AS LIVING TOO SHORT can be planned with Life Insurance Planning, Retirement Planning covers the problem of LIVING TOO LONG and hence is an integral part of a financial plan.
Strategies are designed to suit individual goals and comfort level as well as to take advantage of tax saving opportunities. For any plan to be effective, it is necessary to implement these strategies and to review the goals periodically.
Young person and we are talking about retirement, but most of us today want to retire at the age of 40 or 45. Retirement doesn’t necessarily mean stop working when we can work no more or retire at the age of 58. The modern age retirement means you retire when your investment income surpasses your salary or active income. In other words you can stop working and still maintain the same life style. Inflation and interest are factored to know the exact amount of the retirement fund.
INVESTMENT PLANNING
Living too short or living too long, both are covered, but in case of emergency, proper investment planning plays a vital role. Any good investment plan is one, which is balanced but diversified, absorbs risk and maximizes returns. We can do the following to benefit from investment planning:
Create an Emergency Fund: An emergency fund is usually a separate account that is maintained to meet unexpected and important short-term needs such as car repair or a new appliance or a sudden health crisis. Emergency funds are established to minimize the effect of an unexpected event such as temporary job loss or reduction in income.
Asset Allocation: Asset allocation is the process wherein we can match our risk tolerances and financial objectives to our investment portfolio. Selecting different asset types may reduce the risk of the overall investment portfolio. Most common asset classes are,
·Cash or short term investments (savings accounts, money market funds etc)
·Fixed Income investments (Cash Deposits, bonds etc.)
·Equities (domestic and foreign stock, equity mutual funds etc.
Allocating our investment to various assets classes depends on factors including investment objective, time horizon, attitude towards acceptable risk, desired return and tax bracket.
The rule that is to be followed here is, “PAY URSELF FIRST”.
This rule can be put in use by starting systematic investment plans offered by many mutual funds, wherein a specified amount is invested each month in selected managed diversified funds. Normally we get worried about the returns on the products and wait for the ideal investment opportunities thereby losing a lot of time. However, we need to understand that if we don’t save money regularly then on what amount will we get return?
FOR EXAMPLE:
If A saves Rs.5000 per month for 5 years, then he saved Rs.300000. If he would have spent all that money, then where does the question of return comes from? Here comes the job of a financial planner who plans the cash flow thereby helping to save that little extra money and places them in right investments to give reasonable return.
Now the last aspect that is to be covered and cannot be ignored is Tax and Estate Planning.
TAX & ESTATE PLANNING
Tax planning involves the art of minimising taxes by making investments in tax-favoured instruments and planning well in advance. On the other hand Estate Planning too plays an essential role in financial planning. Some think that estate planning is for the wealthy, a belief that is simply not true. An estate plan allows us to decide how our assets are to be distributed, both during our lifetime and on our death. Preparing an estate plan involves understanding of the legal documents, concepts and strategies, which a solicitor can very well make us aware of.
After explaining Financial Planning as a whole, we need to understand that we being good at our field of work would ensure higher growth, higher salaries and higher income but understanding the aspects of financial planning will ensure us a higher net worth. So it’s important to be aware of these concepts if we want to live a luxurious life throughout without compromising on our desires.
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